Jhawker85 Writes

Investing Strategies Technical Trader's Sanctuary
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I’ve taken the liberty to bump this post to the top of the queue, because I think the point he’s making is important.

“It is worthwhile to have several investing or trading systems that you become comfortable with. People always talk about diversifying your stocks. But it is more important to be comfortable with a diverse set of approaches to investing. There are things to be gleaned from different approaches that can strengthen your overall personal portfolio management.”

What is the supposed purpose of ‘diversification’ within one’s stock portfolio? To reduce overall risk, right? The theory goes like this. If you own stocks that wiggle and waggle differently, what you might be losing on some of them, you might be gaining on others. But what, in fact, happens when markets are under severe stress? Correlations go to 1.0, and the supposed safety of owning “a diversified stock portfolio” disappears. (“Been there. Done that”, as have we all.)

To some extent, hedging against market downturns can be done by investing across several different asset classes, not just equities. But another way to keep (some of) your sanity when markets go crazy is to not be making the same bet multiple times, such as focusing on only small-cap/mid-cap growth stocks. Instead, consider selling short or using various options strategies, or trading the ‘ripples’ and ‘waves’ of a market with a portion of your money while also investing in the ‘tides’ with maybe the bulk of it.

I think the point Jhawker makes is important, and I think it merits discussion. Jump in, please.

Arindam

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Not sure exactly what you are specifically asking Arindam, seems a bit like asking for the meaning of life. :laughing: I often tell friends when they ask, that the best way to invest is whatever let’s you sleep at night. If you are asking is diversification investment vehicles or investment techniques, it’s both. But I feel that it is not a set formula but is totally shaped individually based upon a person’s specific situation, plans and goals, as well as psychological makeup. Age, long and immediate needs/goals, what we have seen others do and comfort level all factors in.

Asset class diversification perhaps is best, but I personally find it very complicated to understand bonds, stocks, currency, futures all together. Show me one Youtube supporting one class and I’ll find ten opposing it. So I personally do not put much into keeping a certain percentage bonds, stocks, whatever and am basically all equities in active investments (but do always have some in cash). I do have “buckets” of what I anticipate will be longer term hold stocks that I expect to do well with time and often have dividends. But I often keep stops on them, especially to preserve profits. I have buckets of stocks that I always place OCO orders on the same time I purchase them cause I am happy to milk 5% or so and move on to another. I have a bucket of money I use to do options, but have settled down to more “income-generating” verticals and selling puts. Don’t often do straight calls or puts shooting for the fences. I leave that to the younger players as I am in my 8th year of retirement, having retired at 57. Capital preservation is a perspective I try to always maintain because we live on that. I always think of Alexander Elder who wrote in one of his Trading Room books that his main goal in trading was to not loose money. I have always appreciated that perspective rather than saying it’s to make 100 million or whatever.

I do NOT actively try to diversify my holdings by type of stocks I hold. Although, I do actively pursue sector rotation in looking for targets for my different approach buckets. I’m sure I violate most rules in books on financial management and probably make financial consultants nauseated. But I think risk is mitigated by active managing and most importantly, constantly trying to learn approaches and techniques. I sleep better working with what I know best and not diluting my focus. But always remembering that I do NOT know but a tiny fraction of even that. Guess I do have one significant classic diversification, as I didn’t retire without a contingency plan, and that is our real estate.

Not sure this is what you were asking for Arindam, but there it is anyway. Hope we never have to find out how wrong and stupid I’ve been in my approach.

Lakedog

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I think that at the root of my comment, the key idea was that there likely is not one perfect style, and that we should keep learning about styles until we find what we are most comfortable with. But that it likely would not be just one style that works in perpetuity.

I know that I invest differently now than I did 20 years ago. Some is due to hard lessons. Some is due to experience. And some is due to study and adapting what other people do in ways that seem to work for me.

But I use multiple styles still. Some styles that seemed to work well, only were actually working well because we were in a specific market at the time. Markets change and we need to have a diversification of styles or tools at our disposal so that we can adapt as needed.

I try to use a psuedo- Ben Graham approach and find undervalued gems that the market has turned its back on (hopefully unfairly).

I also do some long term dividend investments, often tied to this value approach. (I picked up some ET and a couple others in O&G when oil tanked early in COVID and plan to hold it for what it pays for now. I still think there is value there.)

After finding the Bonds board before the Fool change, I accumulated a few bonds that I just wait on while they pay a little. I still have a lot to learn in that sector and am not comfortable with my “tools” for that class. So I do not play there much. Less than 3% of my portfolio.

But I like options, mainly verticals. I find that verticals help take the emotion and my greed factor out of play more than when I just bought simple options. I do still by some simple options when I think there is a play. (I hate META as a company, but when they tanked in November I bought a few LEAPS that worked out for me. Still think they are not really good for society. Not sure how I feel about profiting from that yet.)

I am still refining my options strategy. There are times when cash covered puts make sense. There are times when selling iron condors make sense (which is a lot like a vertical really).

I am trying to understand swing trades, as I think there is a lot of potential there. I just have not learned it well enough yet to feel like it is a solid tool. But I think it is a valuable one to develop along with TA in general.

But I am trying to keep a diverse set of tools available to me that I am becoming comfortable with so that I can adjust to what I might think that a market might better be served by.

I tend to ramble sometimes. In summary, I think that it is better to diversify in your investment tools/approaches rather than to diversify in classes, if that makes sense.

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“In summary, I think that it is better to diversify investment tools/approaches rather than to diversify asset classes.”

Jhawk,

I’ve taken the liberty to slightly rephrase your summary. But you’re on absolutely sound grounds with that idea, which the trading literature backs up in spades. Off the top of my head I can’t name books that advocate such an idea. But probably Perry Kaufman’s are among them, and I know Linda Raschke uses a suite of trading approaches, as well as multiple asset classes.

As for another point you hinted at, but didn’t develop, I share your misgivings as well. How ethical is it to try to make money off of businesses that are questionable, if not truly evil? Everyone will have their own ideas about which those might be. So there’s no need to name names. But I will say that I dumped my holdings in Monsanto’s bonds, because I was no longer comfortable holding them, nor would I buy defense industry stocks. But I have traded in and out of pot stocks and hold a small position in Tilray’s bonds.

Arindam

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